Tags: bernanke, cme, Commodities, gold, inflation, margin, markets, obama, paulson, sell off, silver, slim, Soros
The ins and outs of ‘silver selloff’ explained
Exclusive: Dan Mangru reveals why small-timers are crushed and big boys win
Posted: May 04, 2011
8:22 pm Eastern
By Dan Mangru
© 2011 WorldNetDaily
Almost makes you want to go out and register as a Democrat. That way we can redistribute some of this wealth as our current president would like.
But the current silver market is a classic case of irrational individual investors driving up the price of the market, only to have sophisticated institutions leave them holding the bag.
Well how did this happen and what happens to the silver markets from here?
The silver rally goes back to the bailouts of late 2008. After $700 billion of TARP, billions more to save the auto industry, and the election of Barack Obama, it became very clear that the U.S. was in the mood to print cheap money.
After reaching a low of $8.79, silver began to slowly rally. First it rallied due to Ben Bernanke almost tripling the monetary base. Then it rallied due to the $860 billion Obama stimulus. Then it continued to rally after Obama became the first president in United States history to rack up a yearly deficit in excess of $1 trillion.
Before we knew it silver was trading in excess of $30 per ounce.
Wow. What a move.
After going up some 400 percent individual investors started to take notice. Then as the U.S. markets started to sputter, Ben Bernanke and the Federal Reserve instituted something called Quantitative Easing 2 or simply QE2.
QE2 has the net effect of placing more U.S. dollars into the financial system and ultimately into circulation.
When more dollars are placed into the market without the necessary demand, inflation happens.
This was the impetus that individual investors needed to get in the game. Silver again started to skyrocket.
Then came news that Bernanke didn’t plan to stop QE2 by this June and planned to take it further.
We now saw silver hit intraday highs in excess of $49, a sign of major speculation and irrational exuberance.
You see in silver markets, many individual investors are leveraged buyers of the metal. What that means is they take a loan out to buy more silver than the money they have in deposit.
While some individual investors use a smart amount of leverage, many times they are tricked into borrowing anywhere between 4-8 times their money.
Case in point, if you had $10,000 cash in your account, you could buy let’s say $50,000 worth of silver borrowing at 5:1 or five times the amount of money you have in the account, for a total borrowed amount of $40,000.
Utilizing margin is supposed to maximize your profit, but when used unwisely, it maximizes your risk.
If you bought silver between $47-49 with this type of margin, your overall account value would be in the area of $37,000-$39,000 (depending on fees, costs, etc.).
That means that you have lost all of your original $10,000 and you are now liable for the difference between your account value, in this case $37,000-$39,000, and your loan value, which in this example is $40,000.
Had you just bought $10,000 worth of silver, your account would be down to about $7,500-8,000 but you would still have positive equity. With unsafe leverage in our example above, you end up owing between $1,000-$3,000. This is known as a margin call.
From $8k to owing up to $3k. That’s a very big swing.
Now getting back to overall markets. Realizing that leverage and speculation were driving prices higher, the CME Group (which is the owner of the Chicago Mercantile Exchange) hiked margin requirements three times since the beginning of last week.
This caused firms to tighten up their leverage and some firms even made stricter requirements than the CME Group.
The reduction in the amount of leverage that can be used caused selling pressure to increase last week which brought silver down to $45 an ounce after trading higher than $49 per ounce just days before.
Then add on top of this a once in a lifetime event (literally), with the death of Osama bin Laden. This sent silver prices, which rallied back to $48.22, down to $42 per ounce.
However, once the market absorbed the Osama factor, silver prices rose in excess of $47 off its Osama lows.
Institutions know the game. They knew that with margin requirements tightened that if they started selling they could trigger a significant selloff in silver. So they did.
As institutions were selling, individuals who were overleveraged in silver began what the term “margin call” means. As the price went down, it triggered individual investors to sell their positions in order to cover their investment amounts. This drove down the price of silver even further.
Add on top of this hedge fund gurus like George Soros indicating that he will start to liquidate his long gold and silver positions, and the down market can take on a life of its own.
As the market continues to go down further, shaking out most individual investors, we will start to see institutions re-enter the game, buying back in the $30s the same metals that they sold in the $40s.
You see even the institutions that are just getting out now (in the low $40s to high $30s range) aren’t concerned because they’ve been buying silver since it was trading in the $15-20 range.
So to them all they lost was just a couple bucks of profit.
But the opportunity to take silver from $49 to let’s say $36 just to buy it back again and ride it all the way to $50, that’s a score.
For silver buyers out there, key adages provide the proper insight into these markets.
The first adage to follow is to remember history. Historically, gold trades at a 16 times premium to silver. These days that ratio is at 38 (meaning the price of gold is 38 times the price of silver.
Although margin requirements on silver are now more onerous than those on gold, the underlying fundamentals and price ratios for silver make it very attractive.
Secondly, individual investors in silver should be long-term players, not short-term flippers.
Silver is a dangerous metal. It can go up and down as much as 20 percent in just a couple of days. We’ve seen that before. We’ve seen it now. And we will certainly see it again.
If you are a long-term player you can afford to sit out these short-term hiccups and just focus on the long term fundamentals. The U.S. dollar is heading down, emerging markets are consuming more, and the demand for silver (industrial, inflation-hedge, and luxury) is increasing.
Just look at U.S. debt. We have $14 trillion in unfunded Social Security liabilities, $77 trillion in unfunded Medicare liabilities, and $19 trillion in unfunded prescription drug liabilities.
That’s $110 trillion new dollars that we have to print just to cover our existing liabilities. God forbid that President Obama figures out a new way to start spending even more money.
So when you want to know where the price of silver is going, I’m going to give you the same answer that Steve Forbes gave me today while we talked at Starbucks, “Just follow Ben Bernanke.”
Because as Bernanke gets the orders to print the dollars to pay the bills, silver will go up and up and up.
The Lost Peter Schiff Interview – Freedom Fest 2010 January 18, 2011Posted by Admin in Interviews.
Tags: America, bernanke, business, constitution, dan mangru, fed, federal reserve, finance, Fox, free, freedom, liberty, monetary policy, peter schiff, rights, tv, United States
Originally filmed on July 8, 2010, this exclusive Dan Mangru interview with Peter Schiff, conducted at FreedomFest 2010 in Las Vegas, was broadcast on Fox Business but then was thought to be lost forever until now. Now view what former U.S. Senate Candidate and Euro-Pacific Capital President Peter Schiff thinks about freedom and the state of our nation.
Why real-estate quagmire stays, and stays, and stays … – Dan Mangru WND (WorldNetDaily) Exclusive Commentary November 10, 2010Posted by Admin in Market Commentary, News.
Tags: America, bernanke, economy, Foreclosure, housing, markets, mortgages, obama, real estate, recession, subprime, treasury, underwater, United States
Why real-estate quagmire stays, and stays, and stays …
By Dan Mangru
Posted: November 09, 2010 5:37 pm Eastern
We live in an instant society.
Want to watch your favorite movies any time of the day? We have Instant on Demand.
Didn’t think that Terrell Owens got both feet in for his touchdown on Monday Night Football? No worries, we have instant replay.
We have instant popcorn, instant pudding, and pretty much instant everything.
So with all the advances of modern technology, what is taking so long to clean up the real estate market?
We have all of the tools to fix the market.
Want to start selling foreclosures? We can use the power of the Internet to do massive online foreclosure auctions as opposed to gathering on the old courthouse steps.
Want to gather investors? Start an investment group on Facebook. It’s really that simple.
Yet despite all of the tools available to us, the real estate markets remain a disaster.
National home prices have changed -5.0 percent quarter-over-quarter. In fact, looking at national home prices since their mid-August peak, price declines are even more dramatic, changing -6.8 percent.
Roughly 1 out of every 4 homeowners has negative equity in a home (meaning that their home is worth less than their mortgage).
And just last month, all of the major banks halted the sale of foreclosed properties.
So what has been the government’s response to all of these problems?
A Candid Appraisal of the Recovery – John Browne Commentary October 1, 2010Posted by Admin in Market Commentary.
Tags: bernanke, debt, deficit, economy, elections, euro-pacific capital, eurozone, fed, gdp, global, GOP, john browne, markets, monetary policy, recovery, taxes, The Mangru Report, U.S.
A Candid Appraisal of the Recovery
By John Browne
Over the last two weeks, seemingly good economic news offered some shreds of optimism to a stock market that was desperate for a pick-me-up.
The week before last, the National Bureau of Economic Research declared that the US recession had ended back in June 2009. At the beginning of last week, news came in that month-on-month retail sales had risen by 0.4 percent. Combined with successful government debt auctions in the eurozone, increasing expectations that Republicans will take back the House (thereby blunting the leftward drift of Washington), and hopes that a new round of quantitative easing will pump up growth, mainstream analysts are developing a feeling of near-euphoria.
Although it hard to begrudge the punch drunk for grasping at a little hope, investing is a dispassionate endeavor that calls for close and realistic analysis. In that spirit, let’s dig deeper into the recent ‘good news.’
First, the single month’s rise in retail sales was a blip on what has been a long-term downtrend. Furthermore, retail sales in August typically get a large boost from seasonal ‘back to school’ spending. This year, retail sales were boosted further by temporary tax incentives and vendor discounts.
Second, the successful auction of debt from worrisome eurozone countries, like Ireland, only served to further camouflage the ongoing risk of sovereign default by these states. None of them have committed to a comprehensive program of austerity and market liberalization – Ireland maintains a ‘too big to fail’ doctrine while Greece is on the verge of riots from its so-far modest efforts at privatization. None of the PIIGS would have had successful bond sales if Germany hadn’t been pressured into becoming a ‘sovereign of last resort’ for the whole currency area.
Apart from health of the weakest nations, a more important issue is understanding how sovereign debt is analyzed by investors in the first place. Those who consider buying government debt have for many years relied on backward-looking measurements such as debt-to-GDP to analyze the investment quality.
But that’s only half the picture, and oftentimes it’s even less than that. It does not include off-balance sheet items such as unfunded pensions, social security payments, or health obligations. For the US, I estimate this total debt amounts to some $134 trillion – nearly ten times the ‘official’ figure.
On a deeper level, using the public debt-to-GDP ratio to assess sovereign solvency implies that governments have access to the entire annual production of their economies. In reality, they have access only to that portion which is taxable. As taxes increase, there are natural limits imposed by increasing inefficiency and avoidance behaviors. Therefore, ‘net GDP,’ the portion available to the government for debt service, is significantly smaller than the gross GDP of the nation.
With real government debts, including off-balance sheet items, far larger than officially recognized and net GDPs far smaller that top-line GDP, the solvency of many sovereigns should be considered dubious at best.
For example, the debt-to-GDP ratio of the United States is currently 65 percent, which puts the country towards the solvent end of the debt spectrum among developed Western nations. However, the real debt-to-net GDP ratio is a staggering 358 percent, making the US the most insolvent nation in the group, behind even Greece!
In the interest of brevity, I will only touch on the fact that the above number is actually still an underestimate. It does not account for the portion of gross GDP claimed by state and municipal governments to service their debts. After all, all levels of government tax the same base. So, the effective portion of GDP available to the US federal government is even smaller still.
The third problem with the late round of ‘good news’ is that while a GOP sweep of House races looks likely, it is unlikely to make a large impact on policy. It is doubtful that the small number of freshman GOP Representatives will be able to win over their more mature, big government-minded colleagues. Any pending GOP ‘small government’ revolution will be heavy on talk and short on accomplishments.
It should come as no surprise that the Republicans’ “Pledge to America” lacked specific commitments for cost-cutting. Republicans are terrified of becoming the party of austerity, and the next Republican President will want to avoid being seen as ‘Hoover 2.0’. Therefore, any structural changes will come slowly – and perhaps too late.
Finally, whatever actions the Fed takes in the name of further stimulus will have the same unintended consequences as all previous stimulus efforts. Long-term sustainability will be sacrificed in favor of a short-term boom. Since World War II, the underlying strength of the US economy has allowed the central bank to get away with this strategy, as the economy simply outgrew the inefficiencies caused by monetary manipulation. But what happens when we are in a period of secular decline?
So we see that Wall Street is again playing the part of Pangloss. Unfortunately, their purported inklings of a renewed rally in the US markets do not stand up to candid appraisal.
John Browne is the Senior Market Strategist for Euro-Pacific Capital and a featured panelist on The Mangru Report on Fox Business. To view his previous commentaries please click here.
It’s Good To Be “Big” In America – Dan Mangru Exclusive WorldNetDaily (WND) Commentary July 20, 2010Posted by Admin in Dan Mangru, Market Commentary.
Tags: bank of america, banks, ben, bernanke, billion, borrowing, Chairman, citigroup, corporate profits, dan mangru, dow, entreprenuers, federal, fitch, goldman sachs, Harvard, howard silverblatt, interest rates, JP Morgan Chase, lending, mangru, mangru report, MIT, monetary policy, moody's, reserve, S&P, Small Business, trillion, william dunkelberg
It’s Good To Be “Big” In America
By Dan Mangru
It was the best of times. It was the worst of times. It was the age of record profits. It was the age of bankruptcy and corporate cuts. It was a season for bailouts and free fed cash. It was a season for depression and the disappearance of credit.
These sound like two wildly different economies, don’t they? Two wildly different circumstances, two wildly different places. Yet sadly, they are but one United States of America, the land of the haves and have-nots, the big and the small, bailouts and all.
In fact, big is the American way. Big cars. Big houses. Big government. Big everything. We are Americans and we like things big.
So when it comes to big banks and big corporations, we say the bigger the better. Let the good times roll.
And if you are a big company, the times couldn’t be better.
Big corporations and big banks have easy access to credit and low interest rates. This has helped them leapfrog any appearance of a depression.
For Q2 of 2010 analysts are projecting a 42-percent jump in profit among S&P 500 companies. For Q3 of 2010, which ends September 30, analysts are projecting only a paltry 31-percent jump.
It’s not just profits though. Big corporations are stockpiling their reserves with billions of hard cold cash.
In March 2010, cash on hand at S&P 500 companies rose to a staggering $837 billion – roughly 18 months’ worth of profits amongst those companies.
S&P senior analyst Howard Silverblatt expects that record-breaking number to be even higher when the Q2 April-June 2010 figures are reported later this quarter.
Now you might say, “Well, what about big banks that were supposed to fall, like Bank of America and Citigroup. They are still in trouble … right?”
The answer to that question is absolutely not. Not after the government spent hundreds of billions of dollars to bail out the largest banks.
Want proof? Just look at Citigroup’s balance sheet. Citigroup currently is sitting on $757.68 billion. That’s right, three-quarters of a trillion dollars for one of the weakest banks on Wall Street.
Thank you, Ben Bernanke.
Yep. It is good to be big in America. Big banks and big government all working together in harmony.
So what’s the big deal (no pun intended)?
Well, that little thing we like to call small business is anything but small. You see, small business plays a vital role in our economy.
Small businesses employ human capital as opposed to offshore human capital like the big boys do.
According to Federal Reserve Chairman Ben Bernanke small businesses employ about half of all Americans and account for 60 percent of job growth.
To boot, the newest of small businesses, those two years and under, account for about 25 percent of all job creation, even though the newest of small businesses employ less than 10 percent of the American workforce.
Essentially, what that means is that small-business jobs are new jobs, and, in an economy which has roughly 10-percent unemployment, the U.S. could use some new jobs.
You are probably thinking, well if all of the big banks and corporations are flush with so much cash then they must be lending to small businesses.
WRONG. Even as big banks have padded their balance sheets to record levels, lending to small businesses is on the decline. Small-business lending has gone from $710 billion in Q2 2008 to less than $670 billion in Q1 of 2010. All of this while bank profits and cash reserves have never been higher.
Banks make money by lending money, but if they are not lending money how are they making money? Big banks essentially borrow money for nothing from the Federal Reserve and then buy U.S. treasuries at roughly 3.5 percent interest. They have virtually no risk.
Whatever money that they have left over from buying treasuries they lend out to other big companies that are bailout-protected by the U.S. government just so there’s no risk involved.
Why, lending to those pesky entrepreneurs, innovators and small-business men, that’s all a bunch of hogwash. They are too great a risk to the perfect bank plan of no-risk lending and government payouts.
To support that plan, banks have floated the idea that small businesses don’t need money and actually don’t want it.
They have guys like William Dunkelberg, chief economist at the National Federation of Independent Business, who has gone around the country touting the idea that in a slow economy, businesses that may be losing customers may not want to hire new workers, focus on new technology or expand their businesses.
Because, when times are bad, we shouldn’t focus on new technologies, or investing in new human capital to grow our businesses. Of course not.
I want the big banks to produce all of these small businesses who are refusing to take money. I want to meet them. In fact, I challenge the big banks in America to provide the names of 1,000 small businesses that refuse to take their money.
But, just to placate the American public, the big banks decide to lend to pesky entrepreneurs every now and then.
In fact, a couple of the big banks are trying to claim that they are lending more to small business. Bank of America claims to have lent $19.4 billion to small and medium businesses in Q1 of 2010, up some $3 billion from that same period a year ago.
Keep in mind that same period a year ago, the Dow was approaching 6,500 and the world seemed on the brink of utter financial ruin.
But nevertheless entrepreneurs and innovators get a bone from Bank of America. I guess Bank of America thinks they will all just shut up now.
Some among you might say, “Well, what about interest rates? Are small businesses getting the same interest rates as the big guys?”
Of course not. According to the Federal Reserve’s “Terms of Business Lending,” the average rates on small-business and industrial loans worth approximately $500,000 were 3.5 percent higher than the federal funds rate.
Now 3.5 percent may not seem that high to you but the difference is the highest it has ever been since 1986, which is when those numbers were first tracked.
All of this and Ben Bernanke still doesn’t know why small businesses aren’t borrowing. It doesn’t take a rocket scientist to figure out that, when smallbusiness has to pay an additional 3.5 percent more on interest than everyone else, they probably will borrow less.
That’s just banking 101. But apparently Bernanke didn’t go to class that day when they taught that at Harvard. Maybe he slept through it at MIT.
Bottom line is that he doesn’t get it.
Until the banks have financial incentive to lend to small businesses, they will continue to buy U.S. treasuries and play it safe when it comes to lending.
Big banks are staying close to the federal government, which subsequently is allowing them to make record profits with virtually no risk. That’s a no-brainer for the banks.
Currently, bank minimum reserve rates are roughly 8 percent of overall deposits. The Fed easily could make that 8 percent somewhere between 6 and 7 percent. Along the way it could shut down direct lending and free-money policies that it has extended to Wall Street’s elite.
Those are two simple ways to get the banks moving toward lending and away from being beholden to the federal government.
But who needs solutions when we have a crisis, and, as White House Chief of Staff Rahm Emanuel says, never let a good crisis go to waste.
So instead of lending to small businesses, which is the traditional role of community banks, we are going to give all of the privileges to the big banks, burden the community banks with interest payments they can’t meet (see my previous article) so that they can go bankrupt and be bought out by big banks. That way the big banks can be even bigger.
Same thing goes for big corporations. Why invest in loaning money to small and medium businesses when we can just wait for them to go under and buy them cheap? That way the big corporations in America get even bigger.
That’s the plan for America. The big get bigger and the small get thrown to waste. Since 2008 some 250 banks have gone out of business. None of those banks was named Citigroup, Bank of America or Goldman Sachs.
For those guys it’s the best of times. Sadly for us, it is becoming the worst of times.
Panel Discussions – The Mangru Report – Episode 7 June 20, 2010Posted by Admin in Market Commentary.
Tags: Al Zucaro, bernanke, Dollar, euro-pacific capital, johne browne, marco rubio, mark skousen, martin weiss, moron, parliament, pension, retirement, taxation, taxes, union, world trade center
In case you missed last week’s panel discussions here they are:
Also don’t forget to tune in tonight to the replay of yesterday’s episode (episode 8) which features Marco Rubio and Mark Dubowitz with Martin Weiss, Mark Skousen, and Anthony Pulieri on the panel.